Income Inequality Growing, In Part Due to Government Policies

Wednesday, October 26, 2011 at 7:53 PM by

The top 1% more than doubled their share of the nation’s income between 1979 and 2007, according to new figures released by the Congressional Budget Office. Several factors in both the private and public sector are driving the income inequality, including rapidly increasing CEO salaries, the growth in the number of high-earners in the financial services sector, changes in the way income is taxed, and changes in the makeup of beneficiaries of government programs.

Thirty years ago, income inequality in the U.S. was much less dramatic. In 1979, the top 1 percent of the population earned just under eight percent of after-tax household income, compared to 17 percent in 2007. Here’s a breakdown of income growth between 1979 and 2007:

  • For the top 1 percent, after-tax household income grew by 275 percent in inflation-adjusted dollars
  • For the remainder of the top 20 percent, income grew by 65 percent.
  • For the individuals in the 20th through the 80th percentile, income grew by 40 percent
  • For the bottom 20 percent, income grew by only 18 percent.

Income inequality is returning to levels not seen since before the Great Depression, as illustrated nicely by this New York Times chart. In 1928, the top 1 percent earned 23.9 percent of the nation’s income. That share plummeted with the Great Depression and World War II, hovered between 10 and 15 percent of the nation’s income for about 40 years in the middle of the century, and has been climbing precipitously since the early 1980s. Inequality peaked again in 2007, when the top 1 percent earned 23.5 percent of the nation’s income, before a moderate decline in 2008.

Shifts in the distribution of government benefit payments and changes in federal tax policies have contributed to the increase in income inequality. In 1977, more than half of federal government transfer payments were made to people in the bottom 20 percentile of earners, but by 2007 that share had dropped to 35 percent. This is primarily due to the growth in Social Security and Medicare, which benefit both high and low earners. Over this period, increases in revenue from the regressive payroll tax reduced the progressivity of federal taxes and increased income inequality.

(Keep in mind that the figures being cited here apply only to income inequality in the U.S. Measures of wealth inequality in the U.S. are even more dramatic; in 2009, the wealthiest 1 percent held 36 percent of the nation’s wealth. )

Replacing the progressive federal income tax with a flat tax, as several Republican presidential candidates have proposed, would further increase after-tax income inequality. Herman Cain’s 9-9-9 plan, which calls for individual income and corporate income taxes to be set at nine percent and the introduction of a nine percent national sales tax, would increase the tax liability of households in the bottom 80 percent of earners and give enormous tax cuts to the top earners (as shown in this amusingly long chart). Rick Perry unveiled his flat tax plan just yesterday, and analysts have not yet had time to figure out the details of how different income groups would be affected, but the New York Times quotes Roberton Williams, a senior fellow at the Brookings Institute, as saying “There are two things we can say with certainty: [Perry’s plan] will lower revenue and be a great benefit to the wealthy.”

The figures and developments cited in this article describe trends in income inequality at the national level. How is Wisconsin faring with regards to income inequality? In an upcoming blog post, we’ll tackle this question and focus on income inequality trends at the state level.

Tamarine Cornelius

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